The Market Today
U.K. Continues to Wrangle Over Brexit Plan
by Craig Dismuke, Dudley Carter
Business Investment in Equipment Continues to Look Soft in March Durable Goods Report: Durable goods orders fell 1.6% in February on a 31.1% drop in orders for non-defense aircraft, the volatile data series that increased 50% over the previous three months. Excluding transportations items (autos, aircraft, and ships), core durable goods orders ticked high 0.1% in February, in-line with expectations. Capital goods orders excluding defense and aircraft items, the key indicator for future business investment in equipment, disappointed expectations falling 0.1%. Shipment of those same items, source data for the GDP report, were unchanged in February also disappointing expectations. On a positive note, core capital goods orders and shipments were both revised higher in January. Through two months, the data now point to business investment in equipment rising 4% in 1Q.
Auto Sales Expected to Tick Higher: Vehicle sales for the month of March will be released throughout the day with sales expected to increase from 16.56 million units (annualized) to 16.80 million. Recent data point to an acceleration in auto sales over the next few months which would be a positive lift for weaker consumer activity in other areas.
Yesterday – Solid Global Data Questions Market Take of Imminent Slowdown, Fed Ease: Risk assets rose strongly to start the second quarter and Treasury yields were pressured higher by better-than-expected Chinese manufacturing data and a solid run of U.S. economic reports. Two separate PMIs released ahead of the U.S. session showed China’s manufacturing sector expanded for the first time in four months. The data sent China’s CSI 300 up 2.6% on the day and pushed U.S. futures higher overnight. However, the biggest move for U.S. assets occurred at 9 a.m. CT. February’s retail sales report fell short of estimates at 7:30 a.m. CT but solid January revisions absorbed some of the blow. While markets showed little excitement over the consumer data, they couldn’t ignore the compounding effects of better-than-expected updates from the ISM and U.S. Census Bureau on U.S. manufacturing (more below), construction spending (more below), and inventory accumulation. The three major U.S. indices rose more than 1.1% Monday with financials, industrials, and materials companies leading the gains. The S&P 500 jumped 1.2% to close at 2,867, its highest level since October 9 and just 2.2% from a new all-time high. Financials had been shaken by the Fed’s dovish shift that set off of a rapid decline in Treasury yields in late March. However, the sector, led by U.S. banks, rose 2.4% Monday, the strongest performance since January 4, amid a bear-steepening recovery in the U.S. yield curve. Treasury yields spiked after the confluence of global economic data called into question the market’s recent speculation that the Fed would be forced ease policy in 2019. The 2-year yield tracked a repricing in Fed Funds futures (implied yield) higher to add 7.3 bps to 2.33%. The 5-year yield rose 8.9 bps to 2.32% and the 10-year yield added 9.6 bps to 2.50%. Each change was the largest daily increases since a blowout December jobs report on January 4.
Overnight – Markets Hold Gains on Hopeful U.S., China Data: Global markets are mixed on Tuesday as most equity indices at least held their gains from Monday while bond yields unwound part of Monday’s rapid increase. A salve of upbeat data from China and U.S. on Monday helped soothe concerns about a global recession and has continued to support risk markets overnight. Stocks in China drifted after driving Monday’s gains while the rest of Asia was generally stronger, leaving the MSCI Asia Pacific index essentially flat near its highest level since October. The Stoxx Europe moved up 0.3% to trade at its highest level since September. The UK’s FTSE 100 was leading gains in the region as the Pound weakened in response to an increasingly uncertain and complicated Brexit situation. The UK has until April 12 to reach a consensus on Brexit or risk exiting the EU without a deal. While PM May’s plan has been voted down three times this year, Parliament has also been unable to agree to an alternative. The UK Parliament again voted down four alternatives on Monday, leading to a crisis meeting of PM May and her cabinet on Tuesday in search for a way to break the gridlock. Yields in the UK were leading a decline across most of Europe that has helped Treasurys cut into yesterday’s sharp jump. Ahead of this morning’s durable goods report, the 2-year yield had dropped 3.4 bps to 2.30% while the 10-year yield had edged back 3.0 bps to 2.47%. U.S. equity futures were roughly unchanged after recovering during the European session from losses in earlier trading.
ISM Manufacturing Index Bounced More than Expected in March: The ISM’s U.S. manufacturing index bounced back more strongly than expected in March on a big gain in the employment index and solid improvements for new orders and production. The headline PMI rose 1.1 points to 55.3 as the employment index posted its largest single-month improvement since 2015. Employment rose 5.2 points to 57.5, its best reading in four months. Indices tracking production and new orders both recovered from notable declines in February, but remained near the low end of the range from the past couple of years. Weighing on the headline were a modest decline in inventories and less strain on supplier delivery times. Metrics away from the primary indices were also mixed, with the prices paid index up for the first time in five months while backlogged orders and export activity both cooled. While there remains a great deal of uncertainty around the outlook, manufacturers willingness to add to headcount and the recovery in new orders and production should help ease fears of an imminent correction of the U.S. economy.
Construction Spending Adds to ISM Optimism: At the same time the ISM index topped expectations, data from the Census Bureau showed construction spending activity also exceeded economists’ estimates. Total construction spending rose 1.0% in February, easily outpacing the more downbeat 0.2% decline expected. Adding to the surprise, January’s 1.3% jump was an even stronger 2.5% increase and December’s 0.8% contraction was revised to a 0.2% gain. In February’s details, government spending on non-residential construction (+3.7%), primarily the result of state and local spending, offset weakness in the private sector (-0.5%). Overall residential spending rose 0.7% but was solely supported by a 3.6% rise in home improvement activity; single family (-1.1%) and multi-family (-0.4%) construction both cooled. The better spending on home improvement helped offset disappointment in building material sales in the retail sales report released earlier in the day. Overall, the report should have positive implications for 1Q19 GDP estimates.